BUSINESS CYCLE - Classmate · The Business Cycle/Trade Cycle is the ... Conclusion . ... The first...
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BUSINESS CYCLE
Transcript of BUSINESS CYCLE - Classmate · The Business Cycle/Trade Cycle is the ... Conclusion . ... The first...
BUSINESS CYCLE
FRAMEWORK
• Definition
• Phases
• Business Cycle - Inflation
• Factors affecting fluctuations in B.S
Definition
• The Business Cycle/Trade Cycle is the
fluctuation in economic activity that an
economy experiences over a period of time.
• A business cycle is basically defined in terms
of periods of expansion or contraction.
Phases
BUSSINESS
CYCLE
BOOM
SLOW DOWN
DEPRESSION
RECOVERY
In between: stagnation, recession.
• Boom Phase : Expansion or prosperity or Upswing of economy.
• Slow Down Phase : Negative Growth Rate
– Recession Phase : The Negative growth of two successive quarters. It is Contraction or Downswing of economy.
• Depression Phase: The Output contracted by more
than 10%
• Recovery Phase: from Recession to prosperity(lower turning Point).
Boom Phase
• When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.
Features: – High level of output and trade.
– High level of effective demand.
– High level of income and employment.
– Rising interest rates.
– Inflation.
– Large expansion of bank credit.
– Overall business optimism.
– A high level of MEC (Marginal efficiency of capital) and investment.
• Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity, it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom.
Slow Down Phase
• During a this period, the economic activities slow down.
• Features: – When demand starts falling, the overproduction and future
investment plans are also given up.
– Steady decline in the output, income, employment, prices and profits.
– The businessmen lose confidence and become pessimistic (Negative). It reduces investment.
– Expansion of business stops, stock market falls.
– Orders are cancelled and people start losing their jobs.
– The increase in unemployment causes a sharp decline in income and aggregate demand.
• Generally, recession lasts for a short period.
Depression Phase
• When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in.
• Features: – Fall in volume of output and trade.
– Fall in income and rise in unemployment.
– Decline in consumption and demand.
– Fall in interest rate.
– Deflation.
– Contraction of bank credit.
– Overall business pessimism.
– Fall in MEC (Marginal efficiency of capital) and investment.
• In depression, there is under-utilization of resources and fall in GNP (Gross National Product). The aggregate economic activity is at the lowest, causing a decline in prices and profits until the economy reaches its Trough (low point).
Recovery Phase
The turning point from Recession to expansion is termed as Recovery or Revival Phase.
• During the period of revival or recovery, there are expansions and rise in economic activities.
• Features: – When demand starts rising, production increases and this causes an increase
in investment.
– There is a steady rise in output, income, employment, prices and profits.
– The businessmen gain confidence and become optimistic (Positive). This increases investments.
– The stimulation of investment brings about the revival or recovery of the economy. The banks expand credit, business expansion takes place and stock markets are activated.
– There is an increase in employment, production, income and aggregate demand, prices and profits start rising, and business expands.
– Revival slowly emerges into prosperity, and the business cycle is repeated.
Business Cycle - Inflation
• During the expansionary or prosperity phase,
there is inflation
• During the contraction or depression phase,
there is a deflation.
Factors affecting fluctuations
1. Economic instability and uncertainty (due to logical or illogical expectations) may discourage investments thereby reducing growth in the long-term.
2. A lack of the creative destruction (i.e. innovation) may put the economy in a slump or slowdown in its overall production.
3. Anti-inflationary government policies (specially when general elections are nearing ) may direct the attraction of investors in the economy.
4. Unforseen disasters may cause economies to fluctuate.
Fiscal Policy
• Meaning of Fiscal Policy
• Main Objectives
• Budget Terminology
• Fiscal Crisis
• Causes of Fiscal Crisis
• Consequences of Fiscal Crisis
Meaning of Fiscal Policy
The fiscal policy is concerned with the raising
of government revenue and incurring of
government expenditure. To generate revenue
and to incur expenditure, the government
frames a policy called budgetary policy or
fiscal policy. So, the fiscal policy is concerned
with government expenditure and
government revenue.
Main Objectives
1. Development by effective Mobilisation of Resources 2. Efficient allocation of Financial Resources 3. Reduction in inequalities of Income and Wealth 4. Price Stability and Control of Inflation 5. Employment Generation 6. Balanced Regional Development 7. Reducing the Deficit in the Balance of Payment 8. Capital Formation 9. Increasing National Income 10. Development of Infrastructure 11. Foreign Exchange Earnings
Fiscal Crisis
• Revenue Deficit (RD) : It is the difference between revenue receipts (income) and revenue expenditure.
• Budgetary Deficit (BD) : It is the difference between total expenditure and total receipts. Here, both revenue and capital expenditure and receipts are considered.
• Fiscal Deficit (FD) : It is the excess of total expenditure over revenue receipts and grants. In other words, fiscal deficit is the budget deficit plus government borrowings and other liabilities.
• Primary Deficit (PD) : It is the fiscal deficit minus interest payments.
Causes of Fiscal Crisis
1. Increase in Subsidies
2. Payment of Interest
3. Defence Expenditure
4. Poor Performance of Public Sector
5. Excessive Government borrowings
6. Tax Evasion
7. Weak Revenue Mobilisation
8. Huge Borrowings
Consequences of Fiscal Crisis
1. Debt Trap
2. Cut in Capital Expenditure
3. No Increase in Expendture on Education
and Health
4. High Interest Rates
5. Slow Economic Growth
6. Inflation
7. Discourage foreign investment
INFLATION
FRAMEWORK
1. Meaning
2. Inflation Range
3. Types
4. Categories
5. Impact
6. Measurement
7. Other Indices
8. Inflation related terms
9. Controlling Methods
1.Meaning
• Fried a , Inflation is always and everywhere a
monetary phenomenon and can be produced only by a
morse rapid increase in the quantity of money than
output”. • Coulborn defi es i flatio as too much money chasing
too fe goods.
• Joh so defi es i flatio as a sustained rise in prices . • Brooman defi es it as a co ti ui g i crease i the
general price level . • Crowther defines inflation is a state i hich the alue
of money is falling, ie. the prices are risi g.
2. Inflation Range
3. Types of Inflation
• Deflation
• Disinflation
• Reflation
• Stagflation
• Skew Inflation
• Core Inflation
Reasons for Stagflation
• a. rise in oil prices and other commodity
prices along with adverse changes in the
terms of trade;
• b. the steady and sustained growth of the
labour force
• c . rigidities in the wage structure due to
strong trade unions.
4. Categories
• Demand-Pull Inflation.
• Cost-Push Inflation
• Structural Inflation
5. Impact
• Money
• Aggregate Demand
• Banks Interest Rate
• Creditors & Debtors
• Exports & Imports
• Fixed Income
• Growth Rate
• Investment
• Savings
• Tax payers
• Exchange Rate
• Trade Balance
• Employment
• Self-employed
6. Measurement
• The rate of inflation is measured on the basis
of price indices which are of two kinds:
1. GDP Deflator
2. Whole sale Price Index (WPI)
3. Consumer Price Index (CPI).
I flatio is easured ‘point-to-point’.
Whole Sale Price Index
• Introduced in 1942: Office of the Economic
Adviser, DIPP
• 2004-05 Base Year (676 Commodities)
released in September 2011
• Primary Articles – 102
• Fuel & Power – 19
• Manufactured Products – 555
Consumer Price Index
1. CPI-IW: 260 items with 2001 BY
2. CPI-UNME: 146–365 items with 2001 BY
3. CPI-AL: 260 items with 1986–87 BY
4. CPI-RL: 260 items with 1983 BY
7. Other Indices
• Experimental Service Price Index
• Producer Price Index
• Housing Price Index
• Service Price Index
8. Inflation related terms
• Inflationary Gap: The excess of total government spending above the national income (i.e. fiscal deficit) is known as the inflationary gap.
• Deflationary Gap/output gap: The shortfall in total spending of the government (i.e. fiscal surplus) over the national income creates deflationary gap in the economy.
• Inflation Tax
• Inflation Spiral
• Inflation Accounting
• Inflation Premium
• Phillips Curve
• Inflation Targeting
• Skewflation
9. Controlling Methods
• Monetary Measures – Credit Control
– Demonetisation of Currency
– Issue of New Currency
• Fiscal Measures – Reduction in Unnecessary Expenditure
– Increase in Taxes
– Increase in Savings
– Surplus Budgets
– Public Debt
• Other Measures – To Increase Production
– Rational Wage Policy
– Price Control
– Rationing
Fiscal Responsibility and Budget
Management FRBM Act, 2003
• Meaning
• Objectives
• Features
• Conclusion
Meaning
• The FRBM Bill / Act provides rules for fiscal
responsibility of the Central Government.
• The FRBM Act 2003 (as amended) became
effective from July 5, 2004. Under this Act,
Rules are framed relating to fiscal
responsibility of the Central Government,
which came into force on 5th July 2004
Objectives
• The main objectives of FRBM Bill / Act are :-
• To reduce fiscal deficit
• To adopt prudent debt management.
• To generate revenue surplus.
Features
1. Revenue Deficit 2. Fiscal Deficit 3. Exceptional Grounds 4. Public Debt 5. Borrowing from the RBI 6. Fiscal Transparency 7. Limit On Guarantees 8. Medium term fiscal policy statement 9. Compliance of rules 10. Task force on implementation of FRBM Act
1. Revenue Deficit
The first important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of revenue deficit.
Measures relating to reduction of revenue deficits are:-
• The government should reduce revenue deficit by an amount equivalent to 0.5 percent or more of the GDP at the end of each financial year, beginning with 2004-2005.
• The revenue deficit should be reduced to zero within a period of five years ending on March 31, 2009.
• Once revenue deficit becomes zero the central government should build up surplus amount of revenue which it may utilised for discharging liabilities in excess of assets.
2. Fiscal Deficit
The second important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of fiscal deficit. Measures relating to reduction of fiscal deficits are:-
• The government should reduce Gross fiscal deficit by an amount equivalent to 3.3% or more of the GDP at the end of each financial year, beginning with 2004-2005.
• The central government should reduce Gross Fiscal deficit to an amount equivalent to 2% of GDP upto March 31 2006.
3. Exceptional Grounds
The third important feature of Amended
FRBM bill 2000 or FRBM Act 2003 is that it
clearly stated that the revenue deficit and
fiscal deficit of the government may exceed
the targets specified in the rules only on the
grounds of national security or national
calamity faced by the country.
4. Public Debt
The fourth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005. There should be progressive reduction of this limit by atleast one percentage point of GDP in each subsequent year.
5. Borrowing from the RBI
The fifth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with borrowings done by central government from R.B.I. The Amended FRBM bill 2000 or FRBM Act 2003 clearly states that the central government shall not normally borrow from the R.B.I. However the central government may borrow from R.B.I. by way of advances to meet temporary excess of cash payments over the cash receipts during any financial year in accordance with the agreements which may entered into by the government with the R.B.I.
6. Fiscal Transparency
The sixth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with fiscal transparency. The Amended FRBM bill 2000 or FRBM Act 2003 clearly stated two important measures to ensure greater transparency in fiscal operations of the government.
These two important features are as follows :-
• The central government should minimize as far as possible secrecy in preparation of annual budget.
• The central government at the time of presentation of the annual budget shall disclose the significant changes in accounting standards, policies and practices likely to affect the computation of fiscal indicators.
7. Limit On Guarantees
The seventh important feature of Amended
FRBM bill 2000 or FRBM Act 2003 is that it
restricts the guarantees given by the central
government to 0.5% of GDP in any financial
year beginning with 2004-2005.
8. Medium term fiscal policy
statement
The eighth important feature of amended FRBM bill 2000 or FRBM Act 2003 is that the central government should present medium term fiscal policy statement in both houses of parliament along with annual financial statement. The medium term fiscal policy statement should project specifically for important fiscal indicators.
These fiscal indicators are as follows :-
• Revenue deficit as percentage of GDP.
• Fiscal deficit as percentage of GDP.
• Tax revenue as percentage of GDP.
• Total outstanding liabilities as percentage of GDP.
9. Compliance of rules
Finally the ninth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with measures to enforce compliance of rules.
These measures are as follows :-
• The FRBM bill clearly states that the Finance Minister shall review every quarter, the trends in receipts and expenditure in relation with the budget and place it before both houses of parliament the outcome of such reviews.
• The finance minister shall also make statement in both houses of parliament if there is any deviations in meeting the obligations of the central government.
• If deviations are substantial then the Finance Minister will declare the remedial measures which the central government proposes to take in future period of time.
• The rules mandate the central government to take appropriate corrective action in case of revenue & fiscal deficit exceeding 45% of the budget estimates or total non-debt receipts falling short of 40% of the budget estimates at the end of first half of the financial year.
10. Task force on implementation of
FRBM Act
Following the enactment of FRBM Act, Government constituted a Task Force headed by Dr. Vijay Kelkar for drawing up the medium term framework for fiscal policies to achieve the FRBM targets. The task force proposed the following measures :-
• Widening the tax base through removal of exemptions.
• An All-India goods and service-tax (GST) on the basis of a "grand bargain" with States, whereby States will have the concurrent powers to tax service, subject to certain principles that will help foster a national common market.
• Income tax exemption limit to be increased to Rs.1,00,000.
• A two-tire rate structure of 20 percent tax for income of Rs. 1,00,000 to Rs. 4,00,000 and 30% for income above Rs. 4,00,000 for individuals and elimination of standard deduction available to the salaried taxpayer.
• A reduction in the corporate income tax to 30% for domestic companies and the reduction in depreciation rates from 25 to 15%.
• A 3-tier custom duty rates of 5, 8 and 10% to bring down tariffs to ASEAN levels.
• Allocation of greater portion of expenditure to legitimate public goods by revisiting the classification of expenditure.
• Empowering panchayats / local bodies through reserve transfer.
Conclusion
The Amended FRBM Bill 2000 or FRBM Act
2003 despite above criticism can play a very
important role in controlling fiscal deficit and
in bringing transparency in fiscal operation of
the government if it is implemented
effectively in letter and spirit by the concerned
government.
MONETARY POLICY
FRAMEWORK
1. Meaning
2. Objectives
3. Implementation
4. players
5. Instruments of Monetary Policy
6. Other Instruments
7. Limitations
8. Monetary Policy - 1990 Reforms
9. Evaluation
1. Meaning
• Mo etary poli y is policy that employs the
e tral a k’s control over the supply and cost
of money as an instrument for achieving the
objectives of e o o i poli y (Edward Shapiro).
2. Objectives
• Rapid Economic Growth
• Price Stability
• Exchange Rate Stability
• Balance of Payments (BOP) Equilibrium
• Full Employment
• Neutrality of Money
• Equal Income Distribution
3. Implementation
• Biannual Policy:
• April to September.
• October to March
• RBI Financial year
• 1st July to 30th June.
• Two periods
• Slack Period: April – September
• Busy Period: October - March
4. Players
G.O.I
R.B.I
Financial Institutions
People
5. Instruments of Monetary Policy
Quantitative Tools
1. Bank Rate
2. Reserve Ratios
• Cash Reserve Ratio
• Statutory Liquidity Ratio
3. Open Market Operations
• Repo Rate
• Reverse Repo Ratio
• Marginal Standing Facility
Qualitative Tools
1. Rationing of credit
2. Variation of Margin
Requirements
3. Moral Suasion
4. Base Rate
5. Publicity
6. Direct Action
Bank Rate
• It is the rate at which the Reserve Bank is
ready to buy or rediscount bills of exchange or
other commercial papers. This rate has been
aligned to the MSF rate and, therefore,
changes automatically as and when the MSF
rate changes alongside policy repo rate
changes.
Cash Reserve Ratio (CRR)
• The share of net demand and time liabilities
(deposits) that banks must maintain as cash
balance with the Reserve Bank.
Statutory Liquidity Ratio (SLR)
• The share of net demand and time liabilities
(deposits) that banks must maintain in safe
and liquid assets, such as, government
securities, cash and gold. Changes in SLR often
influence the availability of resources in the
banking system for lending to the private
sector.
Open Market Operations (OMOs)
• These include both, outright purchase/sale of
government securities (for
injection/absorption of liquidity)
Term Repos
• Since October 2013, the Reserve Bank has
introduced term repos (of different tenors,
such as, 7/14/28 days), to inject liquidity over
a period that is longer than overnight. The aim
of term repo is to help develop inter-bank
money market, which in turn can set market
based benchmarks for pricing of loans and
deposits, and through that improve
transmission of monetary policy.
Marginal Standing Facility (MSF)
• A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their SLR portfolio up to a limit (currently two per cent of their net demand and time liabilities deposits) at a penal rate of interest (currently 100 basis points above the repo rate). This provides a safety valve against unanticipated liquidity shocks to the banking system. MSF rate and reverse repo rate determine the corridor for the daily movement in short term money market interest rates.
6. Other Instruments
• Liquidity Adjustment Facility (LAF)
• Market Stabilisation Scheme (MSS)
Liquidity Adjustment Facility (LAF)
• Consists of overnight and term repo/reverse
repo auctions. Progressively, the Reserve Bank
has increased the proportion of liquidity
injected in the LAF through term-repos.
Market Stabilisation Scheme (MSS)
• This instrument for monetary management
was introduced in 2004. Surplus liquidity of a
more enduring nature arising from large
capital inflows is absorbed through sale of
short-dated government securities and
treasury bills. The mobilised cash is held in a
separate government account with the
Reserve Bank. The instrument thus has
features of both, SLR and CRR.
7. Limitations
1. There exist a Non-Monetized Sector
2. Excess Non-Banking Financial Institutions (NBFI)
3. Existence of Unorganized Financial Markets
4. Higher Liquidity Hinders Monetary Policy
5. Money Not Appearing in an Economy
6. Time Lag Affects Success of Monetary Policy
7. Monetary & Fiscal Policy Lacks Coordination
8. Monetary Policy - 1990 Reforms
• Reduced Reserve Requirements
• Increased Micro Finance
• Fiscal Monetary Separation
• Changed Interest Rate Structure
• Changes in Accordance to the External
Reforms
• Higher Market Orientation for Banking
9. Evaluation
1. Failed in Tackling Budgetary Deficit
2. Limited Coverage
3. Unorganized Money Market
4. Predominance of Cash Transaction
5. Increase Volatility
Banking
• DEFINITION OF MONEY
• FUNCTIONS OF MONEY
• TYPES OF MONEY
• MONETARY POLICY
• STOCK OF MONEY
• Money is defined as something which is
generally accepted by the society as a medium
of exchange and which can act as unit of
account, can store value and be used for
repayment of debt.
• 1. Medium of Exchange
• 2. Measure of Value
• 3. Store of Value
• 4. Making Payments in Future
•
STOCK OF MONEY
• Following the recommendations of the Second Working Group on Money Supply (SWG) in 1977,
• RBI has been publishing four monetary aggregates (component of money)– M1, M2, M3 and M4 ( are
• basically short terms for the Money-1, Money-2, Money-3 and Money-4) besides the Reserve Money.
• These components used to contain money of differing liquidities: – M1 = Currency & coins with people + Demand deposits of Banks
(Current & Saving Accounts) + Other deposits of the RBI.
– M = M + De a d deposits of the post offices (i.e. savi g sche es’ money).
– M3 = M1+ Time/Term deposits of the Banks (i.e. the money lying in the Recurring Deposits & the Fixed Deposits).
– M4 = M3+ total deposits of the post offices (both, Demand and Term/Time Deposits).
BANKING
1. Meaning
2. Evolution
3. Functions
4. Role of Banks in economic development
5. Various types of banks.
6. Problems of Indian Banking
7. Financial Inclusion
Meaning
• Bank is an institution which accepts money
from public as deposits and gives loans to
them.
• Banking refers to accepting for the purpose of
lending or investment of deposits of money
from the public, payable on demand or
otherwise and withdrawable by cheque, draft,
order or otherwise.
Evolution
• The ord a k see s to ha e origi ated fro the Ger a i orld banck which means a joint stock fund or heap.
• It is possible that the word has also been derived from the Fre h ord banque and the Italian word banco .
• The Italia ord banco refers to a en h at whi h the money changers or medieval bankers used to change one kind of money into another and transact their banking business.
• Thus, the early banking was associated with the business of money changing.
Evolution
• The first public banking institution was The Bank
of Venice, founded in 1157.
• The Bank of Barcelona and the bank of Genoa
were established in 1401 and 1407 respectively.
• These are the recognized forerunners of modern
commercial banks.
• Exchange banking was developed after the
installation of the Bank of Amsterdam in 1609
and Bank of Hamburg in 1690.
• 1770- Hindustan Bank of Calcutta
• 1806- Provincial Bank of Calcutta
• 1840- Provincial Bank of Bombay
• 1843- Provincial Bank of Madras
• 1865- Allahabad Bank
• 1881- Oudh Commercial bank
• 1894- Punjab National Bank
• 1905- Canara Bank
• 1911- Central Bank of India
• 1921- Imperial Bank of India (C+B+M)
• 1923- Andhra Bank
• 1925- Syndicate Bank
• 1949- Banking Regulation Act
• 1ST July, 1955 – SBI (8)
• 1967- Hazari Committee on Nationalisation of banks.
• 19th July, 1969- 14 banks nationalised
• 15th April, 1980- 6 banks nationalised
Functions
• 1. Accepting deposits from public
• 2. Giving Loans
• 3. Keeping Valuable Materials
Various types of banks
• India there are following types of banks.
• 1. Reserve bank of India (RBI)
• 2. Commercial banks.
• 3. Cooperative banks.
• 4. Development banks.
Role of Banks in economic
development
• 1. Removing the deficiency of capital formation
• 2) Provision of finance and credit
• 3) Extension of the size of the market
• 4) Act as an engine of balanced regional
development
• 5) Financing agriculture and allied activities
• 6) For improving the standard of living of the
people
Functions of Commercial Banks
• 1. Accepting or attracting deposits
– a) Savings deposits
– b) Demand deposits
– c) Fixed deposits
• 2) Advancing of loans
– a) Cash credit
– b) Provision of overdraft facilities
– c) Discounting bills of exchange
• 3) Creation of money or credit
• 4) Other functions
– a) Transfer of funds
– b) Agency functions
– c) General utility services
Functions of RBI
1. Regulator of currency
2. Banker, Agent and Adviser to the Government
3. Custodian of cash Reserves of commercial banks
4. Custodian and Management of Foreign Exchange
reserves
5. Lender of the last resort
6. Clearing Function
7. Controller of credit
Mints
• Mumbai, Maharashtra - diamond
• Kolkata, West Bengal - "c" mark.
• Hyderabad, Telangana - star
• Noida, Uttar Pradesh - dot
CURRENCY NOTES
• Indian Security Press – Nasik
• Currency Notes Press – Nasik
• Bank Notes Press – Davis, MP
• Security Paper Press – Hoshangabad, MP
• Modern Printing Press – Salboni, Mysore
6. Problems of Indian Banking
• NPA
• PRIORITY SECTOR LENDING
• DIFFERENTIAL RATE OF INTEREST
• HIGH SLR
• HIGH CRR
• DOMINANCE OF PUBLIC SECTOR
• LOW GOVT SECURITIES INTEREST RATE
Financial Inclusion
• Nationalisation of Banks
• R.R.B
• Swabhiman Scheme
• PSL
• NABARD
• Micro Finance Institution
• PM Jan Dhan Yojana
